SVB BrandVoice: Maximize What You Give, And What You Keep. Consider A Donor-Advised Fund

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By Mark Childs, New York Market Manager

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Founders and investors with illiquid assets, also known as complex assets, often ask our advisory team for guidance on the most effective ways to donate to charity, especially during a high-income year. If this has been on your mind, consider donating highly appreciated public securities or illiquid assets to a Donor-Advised Fund (DAF). A DAF can be an impactful strategy to reduce capital gains, potentially offer a fair market value tax deduction while helping you accomplish your charitable goals.

For example, instead of selling highly appreciated securities such as publicly traded stocks or complex assets and donating the cash, which may be time consuming and/or trigger capital gains taxes, you could donate the securities directly to a DAF. The tax-efficiencies that result from donating complex assets such as private securities, restricted stock or partnership interests can be powerful tools for tax obligations that come about during a high-income year. In addition, using a DAF allows the charity to receive the maximum benefit from your donation.

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Below are a few ways founders and investors may use DAFs to maximize their charitable giving.

Maximizing deductions by donating complex assets

Liquidating complex assets can be involved. However, a DAF can streamline the process. By donating to a DAF, you’ll receive a receipt for the fair market value of your donation for tax purposes.1 The DAF will take the necessary steps to properly liquidate your gift and invest the proceeds in the DAF until you are ready to make a grant.2 As always, remember to consult your tax advisor to discuss the particulars of your individual giving strategy.

How entrepreneurs can donate private stock

Claire owns C-Corp shares with a zero-cost basis currently valued at $3,000,000. She decides she would like to donate $500,000 of the shares to charity. Here’s a comparison of a sale versus a DAF donation of her shares:

Long Term Capital gains tax @ 20% plus 3.8% Medicare surtax. Does not include local taxes

Assumes a discount from FMV due to lack of control and minority interest

When donating via a DAF, the fair market value of your donation of assets held for more than one year will need to be valued by a qualified independent appraisal in compliance with IRS rules, and itemized charitable deductions are limited to 30% of adjusted gross income. Still, excess contributions can be deducted for up to 5 years from the date of sale of the asset.3

Examples of complex asset donations eligible via a DAF

Examples include private company stock (C-corp, S-corp), restricted stock, LLC and limited partnership interests, real estate, Pre-IPO shares, patents, personal property eg, artwork, collectibles4other miscellaneous capital assets and certain alternative investments.

DAFs allow for more flexible and impactful donations

After making your irrevocable donation to a DAF, the fair market value of your gift can flow through to recipients, tax-free. Instead of liquidating the asset and giving a lump sum to a single charity, the asset, now a part of the DAF, can be split up in any way you like, in order to benefit any number of charities.

DAFs allow you to guide how your donations are invested

Participation in a DAF means you continue to have a say in how your donations are invested and when they are distributed. As you recommend, donations can be invested and grow tax-free while they remain in the fund. Then, when you are ready, you decide when and to whom grants are made. Charities to whom you make grants must be a qualified tax-exempt nonprofit organization under section 501 (c) 3 of IRS regulations.

Final Thoughts

Whenever you’re making charitable donations, it makes sense to ensure the results are as tax efficient as possible. However, the process may be involved. SVB Private can help you streamline your philanthropic tasks and make the most of your wealth, for yourself as well as the charities you wish to support.

Of course, prior to any transaction, please consult your legal counsel and tax professionals. SVB Private can partner with your legal and/or tax professionals to help you determine the best solution to fit your needs. For assistance with your charitable giving strategy, contact SVB Private directly.

Footnotes

1. Your donations may exceed the standard deduction limits as outlined by the new tax law. In the case your deductions are less than $24,000, it may make sense to bunch multiple annual contributions into a single year so you can itemize deductions. Donors must obtain a qualified appraisal to substantiate the income tax charitable deduction they are claiming for non-publicly traded stock valued at more than $5,000. The donor reports this value on IRS Form 8283. Remember to consult your tax advisor to discuss your individual giving.

2. When donating securities, it is important to determine whether the sale has proceeded to the point at which you hold the right to receive proceeds from the sale as determined by the IRS. If a contribution is made after all the material terms of the sale have been agreed upon and there is no material risk that the sale will not close, the IRS may conclude upon audit that the contribution is an “anticipatory assignment of income.” In this case, the IRS could require payment of any capital gains tax that otherwise would have been due upon the sale of those shares (plus possible penalties and interest).

3. Charitable contributions of capital gain property held for more than one year are usually deductible at fair market value. Deductions for capital gain property held for one year or less are usually limited to cost basis.

4. Related use needed to claim fair market tax deduction.

The views expressed in the article are those of the author and/or person interviewed and do not necessarily reflect the views of SVB Private or other members of Silicon Valley Bank Financial Group. This content was developed for informational purposes only, is subject to change and does not take into account your particular investment objective, financial situation or need. Since each client’s situation is unique, you should consult your financial advisor and/or tax planning professional before acting on any information provided herein.

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Credit: www.forbes.com /

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